Why Dividend ETFs Are Outshining the Market in Its Second-Most Expensive Period Since 1871

The Market’s Record Valuation Signals Caution for 2026

Major indices have delivered strong performance through 2025, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite posting year-to-date returns of 13%, 14%, and 18% respectively. However, beneath these impressive gains lies a troubling reality: valuations have reached historically unsustainable levels.

The most telling indicator comes from the Shiller P/E Ratio (cyclically adjusted P/E or CAPE Ratio), which smooths earnings over a 10-year inflation-adjusted period rather than relying on trailing 12-month data. This metric minimizes cyclical distortions and maintains relevance even during economic downturns. Dating back to January 1871, the S&P 500’s Shiller P/E has averaged 17.32. Today, standing at 39.59, it sits 129% above its 155-year baseline—perilously close to the 41.20 peak seen earlier in this bull market cycle.

A 155-Year Precedent Demands Investor Attention

History offers a sobering lesson. In the entire span of market records dating back over a century and a half, the S&P 500’s Shiller P/E has exceeded 30 for a sustained two-month period just six times. The most extreme instance occurred in December 1999, when it soared to 44.19 before the dot-com bubble burst catastrophically.

More striking: every single occurrence before the current market environment was followed by equity declines of at least 20% in the major indices. The pattern is undeniable—premium valuations simply cannot persist indefinitely. With potential headwinds facing Wall Street in 2026, investors face mounting pressure to position defensively without sacrificing returns.

Dividend-Focused Strategies Offer Proven Resilience

When uncertainty looms, dividend-paying stocks have historically proven their worth. A comprehensive analysis spanning 51 years (1973-2024) by Hartford Funds and Ned Davis Research revealed that dividend stocks nearly doubled the average annual returns of non-payers: 9.2% versus 4.31%. Remarkably, income-generating equities also exhibited lower volatility than both the S&P 500 benchmark and non-dividend payers.

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) captures this advantage by tracking the Dow Jones U.S. Dividend 100 Index. The fund’s portfolio spans 103 blue-chip companies with exceptional track records, including pharmaceutical leaders like Merck, Amgen, Bristol Myers Squibb, and AbbVie—which comprise four of its top five holdings. The stability of healthcare demand regardless of economic conditions provides consistent cash generation.

Beyond pharmaceuticals, the ETF holds consumer staples powerhouses Coca-Cola and PepsiCo, alongside telecommunications giant Verizon Communications—all businesses known for their predictable, robust operating cash flows even during market turbulence.

Superior Yield Justifies the Selection

The yield advantage cannot be overstated. While the broad S&P 500 yields just 1.12% as of mid-December, the Schwab U.S. Dividend Equity ETF offers approximately 3.8%—more than triple the index yield. This meaningful income cushion becomes especially valuable during market downturns.

Cost efficiency further enhances its appeal. The fund’s expense ratio stands at a remarkably low 0.06%, meaning investors pay only $0.60 annually per $1,000 deployed—well below the 0.16% average for passive ETFs. This minimal drag compounds significantly over extended holding periods.

Valuation Advantage in an Expensive Market

Perhaps most compelling is the valuation positioning. While the S&P 500 commands a trailing 12-month P/E ratio of 25.63, the 103 holdings within Schwab’s fund averaged just 17.18 as of November’s close. This substantial discount to the broader market reflects the maturity of dividend-focused companies—they trade on reasonable metrics despite the market’s elevated overall pricing.

For investors seeking stability, income generation, and value alignment during a period when the market has rarely been more expensive in 155 years of trading history, this ETF presents a strategically sound choice for portfolio construction heading into 2026.